New Requirements for Tax-Exempt Entities

The Internal Revenue Service has recently announced new requirements for tax-exempt organizations. These new regulations became effective June 8, 1999 and apply to all exempt organizations other than private foundations.

Basic Requirements for Tax Exempt Entities

Most people have a basic understanding that non-profit entities can obtain exemptions so that the entity does not have to pay any taxes, either federal or state. What many people do not know is that even though no taxes are due, the entity is still required to file tax returns!

The Internal Revenue Code requires that tax-exempt organizations file an annual information return where its gross income exceeds $25,000 in a single year or where the average gross income over previous years is more than this amount. The penalty for failing to file this return can be as high as $5,000 for each year for which the return was not filed. It is, therefore, important that the exempt organization timely file each year’s returns. Additionally, even a penalty is assessed, with proper representation it is possible that the penalties can be forgiven.

Many people when setting up a non-profit corporation do not realize that the entity is NOT automatically exempt from paying taxes merely because it is a not for profit company. Instead, the entity must file the appropriate applications, both state and federal, to obtain the tax-exempt status. Merely being a not for profit entity does not entitle the entity to the tax exemption.

New developments for public disclosure

The Internal Revenue Service has just released its new disclosure requirements for tax-exempt entities. These regulations require that exempt organizations provide copies of their three (3) most recent “annual information returns”. The “annual information returns” are the tax returns that exempt organizations are required to file.

The new requirements also provide that the exempt organization provide copies of its exemption application. This is the application made to the IRS for tax-exempt status. These documents are required to be provided to any individual making a request for the documents.

If the request is made in person the exempt organization is required to provide the documents immediately. If the request is made in writing the exempt organization has 30 days to provide the requested documents.

The exempt organization is permitted to charge the requesting individual the costs of copying the requested documents. This copy charge is limited to the amount charged by the IRS for providing copies, i.e., $1.00 for the first page and $.15 for each subsequent page.

Electronic publication alternative

One alternative to providing paper copies of the annual information returns and exemption application is providing these documents on a World Wide Web site. However, the exempt organization must still provide requesting individuals with the information about how the forms may be accessed on the Internet.

In general the posting of this information on the internet must be in a format that exactly reproduces the image of the original documents and allows the requester to access, view, download and print the posted documents without paying a fee. The .pdf (Portable Document Format) is one criterion that currently meets the IRS requirements.


The IRS regulations also impose a penalty of $20 per day for failing to provide the requested annual information returns. This $20 per day penalty has a maximum cap of $10,000. The failure to provide a copy of the application for tax-exempt status does not have a maximum cap. The regulations provide that these penalties can be imposed against the responsible persons of the tax-exempt entity.

Therefore, it is very important that a tax-exempt entity obtain the proper advice in relation to its tax-exempt status along with other regulatory requirements.
Courtesy of: J. Caleb Donner is an attorney and a partner in the law firm DONNER & DONNER (Legal Warriorssm). He can be reached for questions at (805) 494-6557 or e-mail: [MAIL][email protected][ENDEMAIL]. Check out their web site at

Author: J. Caleb Donner and Lori Donner

J. Caleb Donner is an attorney and a partner in the law firm DONNER & DONNER (Legal Warriors sm). He can be reached for questions at (805) 494-6557 or e-mail: [email protected]. Check out their web site at

Leave a Reply

Your email address will not be published. Required fields are marked *